🚫Problem Statement

New projects are launched every day thanks to the open source environment, and DeFi exchanges make the process easy and fast. Unfortunately, this expansion was not without its drawbacks. The DeFi world has became a treacherous place for holders to buy into. DeFi exchanges lack quality-control procedures to evaluate the new tokens being listed every day. As one might expect, this has created an opening for scammers in the DeFi space. The most common scam is the so-called “rug pull” in which the developers of a token suddenly withdraw the liquidity, leaving holders trapped without the possibility to cash out. In addition to this, other scams have populated the space, such as pump-and-dump schemes, honeypots, project shutdowns, and many others.

A report from 2021 by The Motley Fool citing data from the Federal Trade Commission (FTC) estimated the amount of crypto scams in 2020 to be around $419 million. This article compares data from the FTC over the previous three years. In 2017 the amount of scams in the crypto space was $50 million. This is an 800% increase in three years, with the data coming from Q1 2021 totaling $215 million in just one trimester.

A Motley Fool survey cited in the same article mentioned 37% of scammed holders did not report the scams to the FTC or to the Securities and Exchange Commision (SEC), meaning that the numbers discussed above could be dramatically higher. Almost every holder in the DeFi space has been rug-pulled at least once. These scenarios dramatically decrease the trust of participants in the DeFi space, especially for those holders who are entering DeFi from a less than privileged financial position.